Radio ad production slow in '06

Analysts aren't expecting return to double-digit annual gains

The radio advertising market is about to wrap up what most in the industry expect to be its second consecutive flat year.

Station groups had to rely on gains at the end of the year to make sure that sluggish U.S. radio spending in 2006 wouldn't end down from 2005, industry observers said.

While most forecast strong fourth-quarter financial reports and radio ad momentum to step up somewhat in 2007, nobody expects a return to the high-single-digit or double-digit annual gains seen in the past decade.

"(Next year's) recovery will be more muted than fourth-quarter guidance suggests," Citigroup analyst Eileen Furukawa said in a recent research report. "Despite bullish fourth-quarter revenue targets, strength in the fourth quarter is attributable to a tighter market from political (ads) and easier comparisons. As such, we don't expect this type of growth to be sustained through 2007 and instead expect a more modest recovery."

Goldman Sachs analyst Mark Wienkes also recently expressed a more bearish view on radio in the new year. "We are not optimistic that sector fundamentals will improve in 2007," he told clients in a note.

Amid the sluggishness, industry observers said that they will keep a close eye on whether and how a Web-based radio ad sales system recently launched by Internet bellwether Google Inc. in a test version will affect radio ad pricing and demand over time.

Some investors this year expressed disappointment that despite Clear Channel Communications' "Less Is More" initiative, which has reduced the amount of ads the radio giant uses, the demand and pricing for radio spots didn't seem to strengthen much for other broadcasters.

"The radio industry got off to an extremely lackluster start in 2006, with 1% year-over-year declines for the radio industry in each of the first, second and third quarters," Furukawa said.

But October brought encouraging news as the Radio Advertising Bureau recently reported industry revenue gains of 6% year-over-year. That was "the best (gain) since a 10% increase in March 2004," Barrington Research Associates analyst James Goss said in a research update. "While this gain was impressive, it was at least partly enabled by an easy comparison versus a year ago when the aggregate figure fell 7%. … Despite this impressive monthly performance, we still feel full-year radio industry spot revenue for 2006 still seems destined to be roughly flat with 2005."

Goss also signaled that he remains cautious about the new year. "At the moment, we are not assuming a significant pickup in overall spot revenue in 2007," he wrote.

Bob Coen, director of forecasting at media agency Universal McCann, projects that national radio ad spending in the U.S. will increase 3% at $4.4 billion for 2006, with local spending down 1% at $15.2 billion.

For next year, he expects national ad growth to reach a more solid 4%, with local forecast to swing to a 1% improvement.

Furukawa forecasts 1%-2% industry growth in 2007, with 1%-2% growth in the first half of the year followed by a second half that will be unchanged.

Amid this somewhat mixed outlook, Wall Street observers suggest that investors must rely on smart stock picking that takes into consideration company-specific factors to find the winners and losers of the new year, though few recommend many radio stocks at this time.

Wienkes recently maintained his "neutral" rating on shares of Emmis Communications and lowered his price target on the stock from $11 to $7.50, arguing that continued pressure on revenue and a recent dividend payment "will prevent any tender offer or stock price appreciation in the near term."